Semiconductor companies that specialize in wireless and wireline communications, otherwise known as “comm. semis,” must respond to industry-shaping trends in order to stay afloat, and remain both competitive and efficient. But what are those trends and which names are staying ahead of the curve, following last year’s rally in stock prices?
“The first trend relates to integrating multiple chips into a single chip. Solutions that were offered across two, three or more chips are now being offered on a single chip. These chips are commonly referred to as ‘system on a chip,’ or SoC,” said Anil Doradla, an analyst at William Blair & Company. Doradla’s coverage universe includes communication semiconductors, wireless communications and electronic components companies.
“I believe companies that have SoC capabilities will continue to succeed. Examples include Qualcomm (QCOM) and Broadcom (BRCM) in the 3G and 4G space, Atheros (ATHR) in the WiFi space, Cavium (CAVM) and NetLogic (NETL) in the non-PC microprocessor space, and Silicon Labs (SLAB) in the mixed-signal space,” he added.
Another important trend Doradla observes is what he calls “application awareness,” which refers to the increased awareness of end-user applications by semiconductor chips and telecom infrastructures.
“Over the past couple of years, companies adopting these trends have seen significant payoffs. Successful companies, such as Starent Networks, now part of Cisco (CSCO), Cavium Networks, FFIV (FFIV), NetLogic Microsystems and Riverbed (RVBD), have one thing in common: All their products are application aware,” Doradla said. “These companies have successfully taken market share from their plain-old-vanilla system counterparts and have created businesses that are rich in ASPs and margins.”
Technitrol TNL (NYSE), a worldwide producer of electronic components, appointed Daniel M. Moloney to be its new CEO. Moloney most recently has been an executive vice president with Motorola and the president of its Home and Network Mobility business. Moloney replaces James M. Papada III who has been the firm’s CEO and chairman. The comp
any has been planning for the succession for a long time. Technitrol appears to have made a good choice for its next top executive.
Moloney had spent ten years at Motorola in a variety of high level positions. The announcement that Moloney will be leaving Motorola comes shortly after the firm made it formal in early February that it would be split into two independent companies. One company to be headed by Sanjay Jha, currently the co-executive of Motorola, would run the mobile phones and setboxes. This was the company Moloney would have worked for if he had not decided to leave Motorola and become CEO of
Technitrol.Moloney appears to have the skills and background to run Technitrol. Keep a close eye on his moves for the next year once he gets up and running.
With many questioning whether or not the semiconductor space has reached its peak or is dangerously teetering on the top of its rally, one analyst maintains a bullish take on the industry, citing strong macroeconomic trends and better-than-expected PC sales as two demand drivers.
“I upgraded my group, the equipment space, in May of 2009. It’s worked out pretty well up to this point,” said Patrick Ho, an analyst at Stifel, Nicolaus & Co. “I think we’re going to see a very good 2010. I’m not a subscriber to the view that things will peak out mid-year, which is what I think some of the bears are saying right now, and the second half of the year is going to be down from the first half of the year. I do not believe that.”
Ho believes last year’s launch of Windows 7 will translate to additional semiconductor demand, as the corporate world begins to update computers from the now 5-year-old Windows XP.
“If you got old PC systems that need to be upgraded, this could the perfect opportunity because you’ve got higher DRAM speed in memory devices, and you’ve got the new operating systems,” Ho said. “This would be the key driver, I think, on the memory side of things.”
The analyst also points to two more recent electronics launches, the Google (GOOG) phone and Apple’s (AAPL) iPad, as drivers of increased handset sales and chip consumption.
“Particularly, again, on the memory side of things, that’s going to be a driver, I think, for additional equipment spending because if the unit goes up, then unit devices go up,” Ho said. “That’s going to help, or that’s going to stimulate additional equipment spending because you have to get those production lines up to meet that type of demand. So I’ve got a pretty bullish view for 2010.”
Earlier today Energy Solutions Inc. ES (NYSE) announced that the firm’s CEO and Chairman, Steve Creamer, had resigned his position effective immediately. The nuclear waste storage firm’s stock price plummeted today. Creamer’s resignation comes just two months after the firm’s CFO, Philip Strawbridge, had resigned. The company immediately replaced Creamer with Val Christensen, who has been serving as the firm’s president since 2008 and was previously evp and general counsel. The apparent abrupt management change was examined in a story by Bob Mims for the, The Salt Lake Tribune
,
…slide may have prompted the new chief executive and the board to hold a quickly-announced teleconference call at mid-morning out of Boston, in which Christensen stressed that Creamer’s departure – though coming earlier than expected – had been part of a succession plan approved by the board early last year.
“This was going to happen this year,” Christensen said. However, he flatly refused to release detailed information on the reasons for Creamer’s admittedly “abrupt” decision to resign some one to five months earlier than originally scheduled. Christensen said Creamer made his decision during a board meeting on Thursday.
“About a year ago, I was made [EnergySolutions] president as part of a longer term succession plan. The board and CEO Steve Creamer identified me as the most likely candidate. Steve’s plan throughout the [past] year was to depart the company sometime in the spring or summer [of 2010].”
The dramatic management change requires investors to keep an extremely close eye on next week’s fourth quarter earnings announcement and moves that top management takes over the next six to twelve months.
In this excerpt from TWST’s interview with Deutsche Bank Securities Analyst Jorge Beristain, who is the Head of the firm’s Americas metals and mining equity research, Beristain discusses his favorite names and ongoing trends within bulk and LME metals.
TWST: Which of the metals or commodities will have the most trouble in 2010? Are there any you would tell investors to stay away from altogether?
Mr. Beristain: With the caveat that I have a fairly narrow metal focus now, I would say that there are metals that are more developed market-exposed and hence may be more over-supplied, like nickel. Nickel is not one where we are taking a particularly strong view on pricing, sort of prices will be flat. There is a strike that’s potentially going to get resolved shortly up in Canada, which is a facility owned by Vale (VALE). The dynamics for the nickel market overall are you’re just having a lot of supply coming online in the next two to three years, still having very weak end-market demand. Again, nickel projects, they tend to get green-lighted three to four years ahead of schedule. So it’s just that projects which are being delivered now were authorized in much better times years ago, and you just can’t shut them down. I mean they’re multi, multibillion-dollar commitments. So that is probably a metal that looks relatively weaker.
TWST: Among the stocks you follow, which two to three are your top picks and why?
Mr. Beristain: Near term I would highlight Cliffs (CLF) because of their iron ore and coal exposure, so they are well positioned in the two top commodities that we think will have the best price performance in 2010, which are still subject to be set. But they are negotiated and once those prices are set, they will last a year. So that gives the company good pricing leverage under an up cycle, like we are seeing right now. I would actually characterize it as a catch-up cycle. In the case of Freeport (FCX), I like the stock because of the company’s free cash flow story based on circa $3 copper prices for 2010. The company is generating a 10% free cash flow yield. Now it’s a question of what do they do with that excess cash, and I believe that any sign that management is willing to return some of this excess cash to shareholders sooner rather than later would be positively received by the market. As a longer-term holding, I would recommend Alcoa (AA), and that’s based on the view that aluminum has not really had its day in the sun as a metal yet. While it has rallied proportionally to other commodities, it has lagged. And if and when it starts to recover, either because of near-term shortage of the metal or longer-term the Chinese ration back because of energy concerns, under either of these scenarios, if you get a rise in aluminum, Alcoa is very levered to an outcome.
An over-levered REIT sector and soft commercial real estate fundamentals will likely set up a negative 2010 for equity REITs, says Steven R. Marks, managing director of the financial institutions group at Fitch Ratings. Marks predicts most REITs will spend 2010 managing their assets and improving occupancies rather than making aggressive investments.
“We have negative outlooks on multifamily, industrial and retail. To start with multifamily, the negativity is driven really by two things. One is, again, soft fundamentals. In addition, multifamily REITs are relatively highly levered. In fact, some of the most levered REITs are multifamily REITs,” said Marks, who also concedes that multifamily REITs offset these concerns with their strong access to capital.
“Industrial REITs are on par with multifamily in terms of being the most highly levered sectors, but that negativity is offset by relatively strong liquidity because, again, a lot of REITs have been able to raise capital and have relatively strong liquidity profiles heading into 2010,” he said.
Marks also has a negative outlook for retail, although he is “stable” on both office and health care REITs. Two companies he considers outliers are Simon Property Group (SPG) and Equity Residential (EQR), both of which have strong access to capital and liquidity.
While strong, secular demand growth from the world’s emerging markets paints a rosy long-term picture for copper prices, the present state of the economy and unrelentingly bullish copper outlook may lead to a cloudier immediate future for the commodity.
“We saw the developed world’s demand falling by 20% to 30% year-over-year – Japan -30%; USA, Europe -20%. Still the price of copper gained 150% from its trough and stays only 20% far from its pre-recession peek,” said Gabor Szocs, a portfolio manager with Concorde Asset Management, based in Budapest, Hungary. Szocs attributes this price standoff to China’s fiscal and monetary stimulus program, and resulting massive copper imports.
“China imports two to three times more copper than in the boom years before the recession. I don’t agree with those who consider this sustainable,” Szocs said. “I believe this massive inventory building will come to an end soon and probably before the developed world’s economic demand will gain foot.”
Despite copper’s scarcity, Szocs warns that the metal’s supply will not stand in the way of a price correction, given copper’s marginal cost of production. And with the global economy in the midst of a slow and most likely painful recovery, the portfolio manager affirms that now is not the time for naive pricing or optimism.
“So what I would like to say with this is that the level of the copper price is pricing in an unrealistically high expectation of the future economic growth.”
In a market in which REITs are trading at a weighted average 23% premium to consensus-estimated NAV, it’s important investors navigate the industry’s priced-in optimism to differentiate the good names from the bad ones.
“Whereas over the past two years, simply making the global decision of whether to be invested in U.S. REITs or not was the most critical investment decision, from here we believe that picking sectors and picking stocks will be very important, as we don’t see the REITs moving as a group, as they have over the last two years,” said Senior Analyst Paul E. Adornato, who covers the REIT sector for BMO Capital Markets’ equity research group. Adornato currently has a “market-perform” rating on the industry as a whole, although he says he is most positive on the industrial REIT sector.
“We like industrial because the asset type is not terribly overbuilt. It’s very generic in nature and when the underlying fundamentals improve, we feel that could set the stage for a relatively rapid improvement in the investment characteristics of that property type,” Adornato said, citing the two main demand drivers for industrial REITs to be replenishing inventory levels and growing international trade volumes. His top picks in this sector are First Potomac (FPO), Duke Realty (DRE) and DCT Industrial (DCT).
Apartment REITs represent another sector in which Adornato sees growing opportunity.
“Over the next 12 to 24 months, we think that there will be a net negative supply of apartments. That is, obsolescence will be greater than new construction,” he said. “That coupled with a stabilizing economy and a potential return to job growth over 24 months should create the conditions for very positive rental rate growth for multifamily owners over 24 months.”
His favorite apartment names are Camden Property (CPT), Home Properties (HME) and UDR Inc. (UDR).
In this excerpt from TWST‘s interview with Daniel Ives, senior vice president and senior analyst in the technology, media and telecom research group of FBR Capital Markets & Co, Ives discusses the trends and growth drivers security software companies should expect to see in 2010.
TWST: Looking at your coverage universe, what type of growth do you expect among security software companies in 2010? What factors will drive that growth?
Mr. Ives: In 2010 we are looking for an improvement in spending, although I would believe modest. I think growth depends on which company you are talking about. I think in general, we will be looking at a 5% to 10% growth from most of the companies that we cover, although that can vary depending on economy and spending.
TWST: For the security software companies, what would you say will be the main drivers of the growth?
Mr. Ives: I think it’s a combination. I think security software is benefiting from being a defensive type of purchase in a tough spending environment. They have navigated the downturn, I think, better than many pockets of software. So I think they will benefit from a better spending environment. But in particular they are also benefiting from what I call “outdated security” – infrastructure out there that’s long overdue for an upgrade. So there is a really a massive upgrade cycle going on as well, which I think security benefits from.
TWST: If you are an investor who is new to the space, which key concepts do you must you understand before putting money into these companies?
Mr. Ives: I would focus on – there are a lot of technologies, but I think you have got to separate the legacy technologies versus some of the next-generation technologies as to where some of the companies are heading and more importantly where customers are buying. I think three big areas in the space for 2010 are going to be areas such as virtualization, WAN optimization as well as speech recognition technology. I think when you think about names that are beneficiaries from some of those trends, you have the Citrix (CTXS), EMC (EMC), Nuance (NUAN), Blue Coat (BCSI) and Riverbed (RVBD). Because 2009 was about survival, 2010 is going to be more about where technology is heading, who are the beneficiaries in the next cycle. So security vendors are extremely well positioned. But I think peeling away the onion, and trying to look at the subsectors and which companies benefit, I think that’s the key.
In his recommendations to investors, Analyst Dan Leonard says some of his top life sciences picks are those companies with the most exposure to government and academic research.
“Right now I am more predisposed to recommending stocks that have a good amount of exposure to academic and government-sponsored research in the tool space because I think that’s a good growth trend worldwide currently,” said Leonard, vice president at First Analysis Corporation. With a more favorable spending environment forecasted for 2010, such public grants and research could make up for sparse R&D budgets coming off of 2009.
“Academic and government-sponsored research support could be improving worldwide. You not only have the NIH stimulus in the U.S., but you have some science stimulus programs happening around the world in places like France and Germany,” he said. “And it looks like the Japanese science spending is actually improving a bit and showing the first signs of life in a long time.”
Other important trends Leonard emphasized to investors are molecular diagnostics, next-generation sequencing and companion diagnostics. Among these three areas he highlights companies Hologic (HOLX), Gen-Probe (GPRO), Qiagen (QGEN) and Illumina (ILMN).
